El Taladro Azul Published originally in Spanish in LA GRAN ALDEA
M. Juan Szabo and Luis A. Pacheco
Oil prices continue their slow and sometimes uncertain comeback in an environment where global crude oil inventory figures show volatility, and some OPEC+ members have failed to comply with their production cuts. Signs of a slowdown in production in the US and escalating hostilities on both the Russian front and the Middle East are supporting geopolitical risk market premiums.
As we have written before, OPEC+, in its oil market control strategy, maintains a system of cuts distributed among its members. However, and as often happens within the cartel, individual compliance has had its ups and downs, both by default and by excess. The year 2024 began with Iraq and Kazakhstan exceeding their production quotas but declared that they intend to compensate for the excess production during the next four months – although Iraq questions the figures used by OPEC. But what is significant is not the unusual “mea culpa” of these countries, but the fact that the market has absorbed the incremental crude oil without affecting inventories, or crude prices. In any case, if the promises come true, it would represent another positive signal for oil prices going forward.
The Middle East
The attacks on the border town of Rafah by the Israeli army continue to dominate the headlines. The military operations of the Israeli forces, which so far have not had the intensity that is feared, keep the region in suspense. Benjamin Netanyahu's government defends its strategy of neutralizing Hamas strongholds in the area as indispensable for Israel’s security. Meanwhile, other actors are working to find a diplomatic solution to avoid the civilian casualties that a large-scale Israeli operation would produce. It is estimated that the area houses half of Gaza's population, most of them refugees from the north of the Palestinian enclave. On Israel's northern border, Hezbollah vowed to fight back after recent Israeli raids in Lebanon, which killed both Hezbollah fighters and civilians. Israel's stubborn stance has created friction with its main ally, the US, which seeks to avoid the regional escalation of the conflict and its effect on oil prices, among other things.
In the Red Sea, the Houthi rebels continue their attacks on shipping in the area, although with less intensity. This time, it is reported that a tanker and a cargo ship were slightly damaged while sailing near Yemen. Sources report that some insurance companies have withdrawn coverage for Red Sea travel or raised premiums to Black Sea levels. As a result, traffic through the Suez Canal is estimated to have decreased by 43%. It is also relevant to mention that the US Navy reported that, on January 28, it had intercepted another shipment of illegal weapons of missiles and other components of war weapons, sent from Iran to the Houthis.
In a curious twist, Commodore Shahram Irani, commander of the Iranian Navy, declared that Iran has legitimate property rights in Antarctica and that they intend to establish a military base at the South Pole. Adverse reactions, particularly from the US, were immediate. Let us remember that this southern territory is governed by the 1959 Antarctic Treaty, of which Iran is not a signatory.
Russia and Ukraine.
In Russia, opposition leader Alexei Navalny died in prison, after a years-long struggle that saw him survive several poisoning attempts, he was 47 years old. News of his death drew widespread condemnation from the West and comes as the Kremlin prepares to orchestrate another election victory for Vladimir Putin in March.
In Washington, military aid to Ukraine remains bogged down in the North American election campaign and, more recently, former President Trump's statements about NATO financing. Music to the ears of Russia, which was also able to achieve a Pyrrhic victory when the Ukrainian army announced that it had withdrawn from the key city of Avdiivka in eastern Ukraine.
Going back to the oil market, the International Energy Agency (IEA) maintained its forecast of demand growth of 1.2 MMBPD by 2024, around 1 MMBPD less than OPEC's much more robust outlook; Both agencies are stubbornly sticking to their projections for this year.
According to the IEA, the increase in demand will be dominated by a few key countries, most notably China and, to a lesser extent, India and Brazil. The top three economies are expected to account for 78% of global oil demand growth in 2024, which is forecast to reach a new high of 103 MMbpd. Likewise, in its report, the agency predicts that the increased global oil supplies this year, led by the United States, Brazil, Guyana, and Canada, should far eclipse the expected increase in global oil demand. However, the production growth programmed in these countries, net of reductions planned in others, would not cover the growth in demand predicted by the IEA.
In short, a complex market complicated more by the politicization of both OPEC and IEA, a polarization that is evident in their divergent visions of the short and medium-term oil market.
As it is, the underlying fundamentals of oil demand and supply appear without major changes, with onshore inventories reduced and marine transit inventories slightly higher, so global volumes remained stable. This balance is precarious, given the growing political risk and the doubts that continue to exist about the global economy in general, and therefore the growth of demand.
Prices maintained their upward trajectory during the week, despite the drop on Thursday the 15th, in reaction to US crude oil inventories, published by the EIA (+ 12.7 MMbbls). However, at the close of the markets on Friday, February 16, prices resumed their upward trend, and Brent and WTI crude oil were trading at $83.47 and $79.19/BBL, respectively.
In other news
· The number of drilling rigs in the US showed a modest reduction (-2), reflecting lower offshore activity and stability in onshore drilling activities. Meanwhile, in the rest of the world, 10 additional units were activated but mostly dedicated to exploration activities.
· The US Federal Reserve (FED) has made considerable and sustained efforts to cool the US economy and control inflation. However, despite high interest rates, the US economy has continually challenged recession predictions. The consumer price index in the United States increased 3.1% year-on-year to 308.417 points in January 2024, compared to an increase of 3.4% in December, but exceeding the market consensus of 2.9%. In the rest of the developed economies, the economic outlook is relatively gloomy, with Japan and the United Kingdom unexpectedly falling into technical recession. Manufacturing output in Germany, Europe's largest economy, has been on a downward trend since 2017, and the decline is accelerating as its competitiveness erodes. These events go against the projections of greater oil demand that underlie most analyses.
· There have been explosions and fires in oil facilities in Russia, Iran, Norway, and of course in the Red Sea, some due to accidents and others due to attacks. These to a greater or lesser extent affect the logistics of hydrocarbons, and keep the oil market nervous.
· Guyana has, in the past two months, become the second largest crude oil exporter in South America, with 550 Mbpd exported to the US and Europe.
VENEZUELA
Political/Economic Situation
The Venezuelan regime intensified its repression with a wave of arrests of activists and critics of the Venezuelan government, which deepens the political conflict and indirectly impacted the economy.
Last Friday, it was Rocío San Miguel's turn. The respected human rights activist and members of her family were arrested and accused of participating in an alleged conspiracy to kill Maduro and other members of the regime. The family members were later released under preventive measures.
The expressions of support for Mrs. San Miguel, both national and international, were immediate. Among others, the Inter-American Commission on Human Rights (IACHR) condemned “the forced disappearance of the activist,” and asked the Venezuelan State “to report on her whereabouts and ensure respect for her judicial guarantees and presumption of innocence.” The Office of the UN High Commissioner for Human Rights also demanded his “immediate release.”
The Maduro regime was quick to counterattack the critics and ordered the suspension of the activities of the Technical Advisory Office of the United Nations High Commissioner for Human Rights and demanded that the staff leave the country within 72 hours. Thus, taking advantage of the opportunity to further isolate themselves from uncomfortable international oversight.
The economic policy seems to have been adjusted to this new “win or grab” political scheme (by hook and by crook), and we observe that contrary to what was expected for an election year, public spending remains at relatively low levels. Moreover, the injections of foreign currency into the foreign exchange market have been extreme, managing to revalue the Bolívar versus the $. But this economic policy, restrictive banking policies, and expectations of reduced income if OFAC General License 44 expires in April, as expected, have given a negative turn to growth expectations in a vicious circle of self-flagellation by the regime.
Hydrocarbon Sector
During the last week, the always irregular electrical service did not have a major impact on production. However, the availability of diluents remains limited, forcing the partial use of improved crude oil to dilute the entire production of the Orinoco Belt.
The refineries are also running at a somewhat higher volumetric rate, but still without impact on gasoline production. There is still hope that a soon start-up of the catalytic cracking unit (FCC) at the Cardón refinery could improve the outlook for supply.
Exports in terms of total barrels will be somewhat lower than last month, due to the shortness of the month, despite it being a leap year, but in terms of barrels per day, they are projected with a marginal increase.
Crude oil production reached the highest levels in recent years, standing at 768 MBPD, distributed geographically as follows:
· West 142 (Chevron 56)
· East 148
· Orinoco Belt 478 (Chevron 89)
· TOTAL 768 (Chevron 145)
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National refineries processed 194 MBPD of crude oil and intermediate products, incorporating an additional distillation unit in Amuay, as discussed last week. However, the domestic gasoline market continued to depend on product imports through barter with Chevron and European companies – also in jeopardy if General License 44 expires in April.
Crude oil exports for February are projected at 612 MBPD, including some diluent and crude oil drained from inventories. The schedule indicates an export of 164 MBPD to the Gulf Coast of Mexico, sent by Chevron. It is planned to supply 180 MBPD of Merey to India, 147 MBPD to China, 85 MBPD in European barter, and 36 MBPD to Cuba. Some 55 MBPD of products destined for Asia and Cuba would also be exported.
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